Switching to a Single Salary

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I’ve had a number of friends and blog readers ask me about switching from a two-income household to a one-income household over the past few weeks, so I can’t help but wonder if this is a topic many more of you may be interested in. Sure, this post is going to be primarily directed towards a family where one spouse has decided to stay at home, but many of the thoughts and tips I’m about to offer can also be applied by a family if one person thinks they are about to be laid off, a family if one of the breadwinners’ health is failing, or even an individual who is going from two jobs to one. Here are some suggestions:

• If you can, experiment before you try it. If Mom is considering staying at home to look after the newborn, agree to stop spending Mom’s current take-home pay for several months to see what it’s like. Except for an absolute emergency, I’d really urge you to hold true to not spending Mom’s take-home pay because lessons you may learn such as not being comfortable with your remaining emergency fund when you had to unexpectedly pay for that new HVAC unit are important lessons that may affect the overall decision and/or timing of going from two incomes to one income.
• Make a painfully detailed budget and see if you can make one income work. If Jane’s career is soaring and John’s career is painful, Jane and John should take a look at what would happen before John tells them to take the job and…, well take the job. There are going to be relatively fixed expenses such as mortgage payments and utility bills, and family revenue will be going down if John quits, so unless Jane makes enough to cover all of the fixed expenses and the discretionary expenses, it’s likely some of the discretionary expenses are going to have to go or at least be trimmed in order to make ends meet. Look to things like shopping, golfing, massages, lattes, unused gym memberships, vacations, and eating out. In happier news, if income is going down, it’s quite possible your taxes will naturally go down, too, so that will at least help a little! This is also a time where it could be beneficial to finish off debts such as student loans or car loans to reduce your fixed expenses and help the math work.
• In some ways, realize up front that you cannot keep up with two-income families. That being said, realize that they cannot keep up with you, either. What I mean is that if one spouse quits working in Family A, it’s possible that Family A’s financial trajectory and spending power may go down when compared to two-income Family B. However, when it comes to the percentage of the family’s time taken up by work, the flexibility of the family, and the amount of time on the weekends the spouses have to spend doing chores around the house, Family B may be a little jealous of single-income Family A. I’m certainly not saying one approach is better than the other. What I am saying is that from the onset, you need to realize there are often pros and cons that can make you different from other families you are close to.
• Put it all out there with your spouse. Going from a two-income household to a one-income household temporarily or permanently is far more than a financial decision. Why are you doing this? Do both of you want this? What if it doesn’t work for the stay-at-home spouse emotionally? What if it ends up not working for the family financially? Do the household chores/responsibilities change? Should they? What will the stay-at-home spouse do for entertainment and social interaction in light of the loss of friendly co-workers? Will the new entertainment and social interactions add to the family expenses? Should they? These are deep questions, and only you and your spouse can hack through them. The hacking does need to be done, though, as I’ve seen some serious resentment and jealousy fester from the employed spouse vs. the non-employed spouse and vice versa.
• Make sure the working spouse is properly insured. There are many careers where once you leave the working world, you become a little “stale” and lose some of your ability to become gainfully employed in the future. With this in mind, the breadwinner’s income stream usually becomes a little more valuable and, accordingly, needs a little more protection. I’d suggest you take a long, hard look at the employed spouse’s life insurance, short-term disability insurance, and long-term disability insurance. Don’t go crazy, just make sure you are adequately protecting the non-employed spouse’s financial well-being should the employed spouse become disabled or meet the proverbial fatal bread truck. If the stay-at-home spouse is providing a service such as looking after children that would still be needed if they were to become disabled or unexpectedly pass away, some additional insurance may also be needed on that spouse to protect the-income generating spouse's financial well-being!

Thank you to those of you who asked me about this topic. I’m always happy to help, but sometimes I can only help if you ask.

 

-Tom

How Saving Money Can Cost You

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I bet you thought I’d lost my marbles when you read this post’s title, but the title is as I intended. Saving money is wonderful, and I often preach the value of saving until I am blue in the face, but not always. Sometimes (hard swallow) saving money may not be so good for you. Saving money can be bad if…

• You buy something with a coupon that you would have otherwise not purchased. You didn’t save money; you got a good deal on an unnecessary expense.
• You buy something that is incrementally or insignificantly cheaper than a higher quality or longer lasting product. I’m talking canned soup, car batteries, air filters, toilet paper, Oreo’s, and other products like these.
• You already have an adequate rainy day fund yet you keep adding to your cash account that is earning you little interest while you have credit card debt, student loans, car loans, and home loans that are costing you lots of interest.
• You already have an adequate rainy day fund, and you are not contributing to your employer’s 401(k) or retirement plan (or you are not contributing enough to get your employer’s match if they offer one).
• You already have an adequate rainy day fund, and you are not investing anything in the stock market. Whether through annual IRA contributions or deposits to a taxable brokerage account, you need to be investing sooner rather than later so you will have a longer time frame to reap the rewards of long-term growth.
• You already have an adequate rainy day fund, but you do not have or adequately have life, disability, property and casualty, and/or excess liability insurance. Having no premiums or low premiums is nice until you need your insurance!

 

Finally, there are two currencies in life: money and time. Saving money is really important, but so is utilizing time. I once had a meeting with an elderly client whose health was beginning to fail, and he asked me what he was supposed to do now that he had all this money and no time to enjoy it. His degree of saving and holding onto his money was self-imposed, so I didn’t feel guilty, but I did feel sad for him. I’ll probably never recommend that you risk your financial security to make a memory, but it is important to be careful how many times you say, “No” or “Next time.”

 

Anything in enough excess can be bad for you. This includes fanaticism for a sports team, chocolate, and saving money. Keep saving, but not too much.

 

-Tom

The Others

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There is insurance for almost everything. Ugly Betty’s smile, Troy Polamalu’s hair, Heidi Klum’s legs, and many other wacky animate and inanimate objects are all insured. Smelling abilities, nonrefundable wedding expenses, and even the Loch Ness Monster can all be tied to improbable and unusual insurance policies. Life insurance frequently comes up in this blog, and in an earlier post, “Surviving Mayhem,” we covered several common types of insurance like car insurance, homeowners insurance, and umbrella policies, but there are still a few types of insurance policies that I have been relatively quiet on. Today, I’d like to offer a few thoughts on “the others:” Short Term Disability Insurance, Long Term Disability Insurance, and Long Term Care Insurance. I know insurance is not always the most exciting topic, but I implore you to read on - I have some tips that I think could be pretty valuable if something unfortunate were to happen to you or someone you care for.

Short Term Disability Insurance
Short Term Disability Insurance is insurance designed to pay benefits for a brief period of time (usually a few months) while someone is disabled. The benefits are usually only a portion of your monthly income, and Short Term Disability Insurance is designed to kick in after a shorter waiting period than Long Term Disability Insurance, usually after just a couple of weeks of being disabled. The value of benefits, the numbers of days before the benefits begin, and the length of time the benefits will last all depend on the specific type of policy you have, but the overall purpose of most Short Term Disability Policies is to get you and your family through a brief period of time when your income is drastically reduced due to illness or injury.

If you end up getting hurt, having a policy is likely best, but as they say, hindsight is 20/20. If you have a highly specialized occupation that would require you to take a substantial reduction in salary to work in a different role, or if you have a very dangerous job (like logging, roofing, or Alaskan King Crab fishing), making sure you have sufficient Short Term Disability Insurance is probably a good idea. That being said, for the Average Joe like me whose greatest daily dangers are my miniature dachshund’s teeth and tripping over my own desk chair, you probably should consider passing on Short Term Disability Insurance IF you have a sufficient rainy day fund. As you may recall, a rainy day fund is supposed to be between at least three and six months’ worth of living expenses that you have set aside in case an emergency occurs or you lose your job… or you are temporarily disabled. A sufficient rainy day fund essentially allows you to self-insure. As you will see below, I’m a much bigger fan of Long Term Disability Insurance than I am of Short Term Disability Insurance, and that is due in large part to how much more comfortable and satisfied many of my clients and I are that they have a sufficient rainy day fund versus relying on (and having to wait for) the insurance company to come through in the event of a temporary injury or sickness. Building up a rainy day fund may not be that much fun or even the easiest thing to do, but after you’ve done it, it won’t be long before it beats paying those Short Term Disability Insurance premiums over and over and over again.

Long Term Disability Insurance
As you might expect, Long Term Disability Insurance is insurance designed to pay benefits for an extended period of time should someone become totally or permanently disabled (or at least disabled for more than a few months). In a nutshell, Long Term Disability Insurance is supposed to pick up where Short Term Disability Insurance (or your rainy day fund) leaves off and get you to where Social Security begins. Because Long Term Disability Insurance could be the only thing protecting you and your family from financial ruin should you become disabled for an extended period of time, it is crucial to make sure you are adequately insured.

There are way too many types of Long Term Disability Insurance policies out there for me to try to cover today, and the truth is, the type of Long Term Disability Insurance you need, if any, will be very specific to you, your job, and your overall financial situation. The key thing I can tell you is that you need to make sure that the benefits of any Long Term Disability Insurance coverage you may have individually or through your employer equates to a standard of living that you are willing to accept should you become disabled for an extended period of time. I can also tell you that if you only have enough money to put towards one type of disability insurance, Long Term Disability Insurance is the way to go. You can get through a few months someway, somehow; getting through a few years or a lifetime with little or no income would be a lot harder.

One final tidbit I can add is directed towards those workers who have the opportunity to choose whether they or their employer pays the Long Term Disability Insurance premiums. Pay the premiums yourself! I know that sounds crazy, but if you end up utilizing your Long Term Disability Insurance and you have paid the premiums, the benefits you receive will be tax-free! If you let your employer pay those same premiums, the benefits you receive will be taxed as ordinary income. Please don’t allow taxes to make your situation worse.

Long Term Care Insurance
Long Term Care Insurance is just like disability insurance in the sense that you might really need it if you somehow know you are going to require health care services for a long period of time, but it can be a complete and utter waste of money if you go out with a bang or quickly and peacefully in your sleep. If you can tell me your “exit strategy,” I can tell you whether or not you need Long Term Care Insurance. You may laugh, but I promise you I’ve had a client look me dead in the eyes and with no hesitation tell me he was going to die in his 84th year. (I’ll let you know how that turns out in 2015!)

Once again, there are all sorts of Long Term Care Insurance policies out there for all sorts of people with different needs, different concerns, and different amounts of money available to throw towards these types of policies, but I can offer a few thoughts.

First, I advise clients who are considering Long Term Care Insurance to think about a baseball bat. Anyone who has ever hit a line drive will tell you that a baseball bat has a sweet spot, and so does Long Term Care Insurance. What I mean is that if the premiums for a Long Term Care Insurance policy would cause substantial strain on your financial situation, you might want to consider passing on coverage that you may never use. If you have a lot of assets and believe you could cover all of your prolonged health care expenses in most all situations, you might want to consider passing on this usually pricey coverage and going with the self-insured approach. If you are at a place where paying premiums won’t be a strain, but you have some concerns about your and your family’s ability to be able to handle the costs of your future health care needs, then you are the sweet spot; you should probably consider Long Term Care Insurance. (Please know that should you or someone you care for need health care services for a long period of time, having a policy is likely best, but you probably already knew that.)

Second, if you are pretty bent on getting this type of coverage, the younger you are the better. You can get more favorable policies at better rates. If you wait until later in life to consider these policies, you will find the cost can be like life insurance - almost unaffordable.

Finally, if you have an annuity and a Long Term Care Insurance policy, there may be a tax savings opportunity for you. If you pay your premiums directly out of your annuity, the distribution could be considered tax-free thanks to the Pension Protection Act of 2006. Please reach out to your investment advisor or CPA if you have any specific questions about this tax break.


I know Short Term Disability Insurance, Long Term Disability Insurance, and Long Term Care Insurance are not fun to think about, but you’ve got to admit, they are at least worth considering. It is my hope that anyone reading this will never have the opportunity to utilize any of the benefits related to these types of policies. I also hope the few thoughts I have shared above will be of assistance.

-Tom